Pension in Event of a Death

In the event of a death there are strict limitations on inheriting any pension or pension rights from the state pension system. If your parent, or partner dies you will not be entitled to any of their State Pension. You may however be entitled to one or more of the following:

• bereavement benefits
• a basic State Pension based on their National Insurance record
• a percentage of their additional State Pension

For more information see also State Pension in event of a Death.

Within two years of your non-state pension scheme learning of your death, your survivors or your estate may be eligible for a lump sum payment. The value of this lump sum and its taxation will depend on your age when you die, the type of pension scheme to which you belonged and / or the method you chose to have your pension paid out on retirement.

Death before retirement

When you die before you have retired your non-state pension scheme may pay a 'lump sum death benefit' to a nominee or to your estate. The value of the lump sum will depend on the value of your pension fund and the terms and conditions of your pension scheme. Some defined contribution schemes (see Occupational defined contribution schemes and Personal Pension Schemes) will pay out your entire pension fund as a lump sum, whilst some defined benefit schemes (see Occupational defined benefit schemes) may pay a lump sum based on your earnings, for example, a lump sum equal to four times your final salary. You will be asked to nominate someone to receive your death benefits should you die: if you fail to nominate someone, the lump sum will be paid to your estate and divided according to your Last Will and Testament. If you die before you begin drawing your pension, this lump sum will be tax-free. It will however be subject to the lifetime allowance, set at £1.65 million for the tax year 2008/2009; if your lump sum exceeds the lifetime allowance the excess will be subject to tax at a rate of fifty-five percent. For more information see Lifetime limit for pension savings.

Death after retirement – over seventy-five years old

If you die when you have already begun drawing your pension, and you are over seventy-five years of age, the lump sum paid will depend on the way in which you chose to draw your pension. A defined benefit scheme pension or a regular annuity will not entitle your survivors to receive any money in the event of your death. When you are over age seventy-five, your survivors will only receive a lump sum if you opted for income withdrawal. The amount they will receive will be equal to the remaining value of your pension fund. This amount can either be paid tax-free to a charity, or used to purchase pensions for your survivors. It cannot be paid out as a cash lump sum. If the authorities consider that you chose income withdrawal in an attempt to pass money on to your survivors and avoid inheritance tax, your remaining pension fund may be subject to inheritance tax at forty percent.

Death after retirement – under seventy-five years old

If you die when you have already begun drawing your pension but you are under seventy-five years of age, the lump sum paid will also depend on the way in which you chose to draw your pension. If you opted for income withdrawal, your remaining pension fund can be paid out as a lump sum to your survivors. This will be subject to thirty-five percent tax. If the authorities consider that you chose income withdrawal in an attempt to pass money on to your survivors and avoid inheritance tax, your remaining pension fund could also be subject to inheritance tax at a rate of forty percent. If you opted for an annuity, your survivors will only be eligible for a lump sum if you chose an annuity that offered a guarantee or a pension protection. These annuities guarantee your pension continues after your death, or pay your remaining pension fund to your survivors in the event of your death. Any lump sum will usually be subject to taxation at a rate of thirty-five percent. If you die when you have already begun drawing your benefits from a defined benefit scheme, the scheme will not generally pay out any money in the event of your death. Some schemes will offer their own version of a pension protection annuity however, and pay out a lump sum based on your earnings, for example, a lump sum equal to four times your final salary. This will be subject to tax at thirty-five percent.

See also Inheritance Tax.